Many apartments in Wichita too run-down to repair, rent

There’s a stretch of East Harry between Oliver and Edgemoor that provides a case study in the consequences of bad landlording.

On the north side is Pinecrest Village, 40 brick fourplexes built by Willard Garvey in 1955. Garvey’s company, Builders Inc., still owns it and says it has put well over $10 million into it and nearby units over the last 15 years. The units are nice and up-to-date, if small, and occupancy is strong.

Across the street, a block south of Harry, sit the Battin Apartments, identical fourplexes also built by Garvey around the same time. They have been vacant for several years. Many are boarded up; scorch marks adorn one building.

The Battin Apartments are in foreclosure and caught in the bankruptcy of Oklahoma City landlords Lew McGinnis and Jennifer Price. They are presently for sale – and therein lies an interesting question.

Some investors think there are several thousand apartment units in Wichita that have become economically obsolete – out of about 33,000 – meaning it would take more to repair them than could reasonably be recovered in rent.

There are always apartments that are too rundown to repair, but the situation has grown worse over the past decade as the housing stock in the center of the city has gotten older, out-of-town ownership has grown, two recessions have hurt demand, banks stopped lending as much and a bubble-fueled surge in home ownership lured renters into buying.

Others, though, are betting that distressed apartments are cheap enough and Wichita’s rental market is strong enough to pay for these units’ return to rentable form, especially if there is government help in some form.

Lew McGinnis

McGinnis and Price, his wife, bought six apartment complexes in Wichita between five and eight years ago, accumulating roughly 1,500 units. That was in addition to many apartments and a lot of commercial property in Oklahoma City and Tulsa. In a court filing last year, Price said the portfolio was worth $131 million.

The pair underinvested for years, wracking up a huge maintenance backlog and, eventually, code violations, according to those involved in the industry locally. For instance, the pool at one of their former properties, Siena Court, 1940 S. Woodlawn, now sticks up out of its foundation.

A few units have been boarded up, although the complex remains open and operating under new management. The pair ran into serious cash-flow problems and declared bankruptcy in 2010, according to court documents.

Bankruptcy trustee Michael Deeba said in a filing last year that McGinnis and Price’s company, Macco Properties, has been sued 15 times over the past two years for breach of contract, foreclosure, fraud and breach of fiduciary duty.

Deeba assigned the Martens Cos. to be the manager for the Wichita complexes as well as the listing agent. All of the complexes were put up for sale.

Fifteen percent obsolete?

Brent DuPont, owner of DuPont Management, said that McGinnis certainly made a bad situation worse.

DuPont, who owns and operates about 1,200 units in Wichita, has been one of the most active buyers of distressed apartment complexes since 2008. He has purchased Park Meadows Apartments near Harry and Webb; Cimarron Apartments at Central and Ridge; and Broadmoor at Chelsea near 21st and Rock.

But he sees many more that he wouldn’t buy.

“If there are 30,000 doors (units), and that doesn’t include Planeview and Oaklawn, I bet 15 percent ought to be torn down,” he said.

These tend to be units in lower-rent parts of town, with damaged foundations or bad roofs or obsolete wiring and gas lines. It would cost many thousands of dollars per unit to bring them up to code. Renting them for $450 or $500 a month just doesn’t generate a high enough return, he said.

He has been in the apartment management business since the 1980s. Starting 10 to 12 years ago, local owners began selling apartment complexes to out-of-state investors. Builders Inc., for instance, sold 1,329 units, including the Battin Apartments, to a Virginia investor in 1999.

DuPont maintains that these out-of-state owners tended not to put enough money into keeping them up, which hurt occupancy, which hurt cash flow, which tended to lower the owner’s interest in reinvesting. Even some of the city’s better apartment complexes have units that have been closed up and unrentable for years.

“You’re seeing what housing has become after being bled over the last 10 years,” he said.

Builders Inc.

Builders Inc. still owns and operates 581 units in the immediate area of East Harry, including Pinecrest Village, and 1,300 in the area, said Mike Garvey, the grandson of Willard Garvey and president of the company.

The company has put millions of dollars into keeping up the units up since 1994, he said, but much of it comes from government subsidies such as low-income-housing tax credits and weatherization grants, in addition to the Section 8 program that subsidizes the rent for some tenants. The government funding has been crucial in keeping the units economically viable.

Pinecrest Village, like much of the housing in the area, had a serious crime problem in the 1990s. That has diminished sharply. Builders Inc. has its own security patrol and works with the Wichita police.

Garvey concedes the return on their reinvestment may not be what some landlords expect, but that it’s necessary because of the company’s whole investment in the area. The complex backs up to a number of Builders Inc. properties including Parklane Shopping Center.

“We do have a vested interest in keeping this up,” Garvey said.

One man’s bet

Brent Hurst is betting that a near dead property can be brought back to life.

He and other investors bought the Linwood Apartments, also former Garvey fourplexes and a former Lew McGinnis property, at Hydraulic and Mount Vernon.

Just 45 of the 360 units are rented. Most of the rest are not in shape to rent, Hurst said. The complex has 50 to 60 housing code violations.

But he’s got big plans.

Hurst has started on his first renovation and plans to renovate eight units a month. The project will take 3 to 3 1/2 years and cost between $5 million and $10 million. The risks are manageable because he spends only a little at a time and gets cash flowing on his investment within a few weeks.

He agreed with DuPont that there are an unusual number of housing units in Wichita in lousy shape, but he said many remain economically viable depending on location and investment required. He expects to make money by reinvesting in Linwood Apartments.

The key to making the economics work, he said, is getting the property at a steep discount. He bought the Linwood Apartments out of foreclosure. Now might be the best time, or perhaps the only time, in decades that such an investment can pay off because somebody else has already taken the loss on the property.

But the other key, he said, is that demand is returning to the rental market and will likely stay. Many people who have lost their homes to foreclosure need places to live, he said. Plus, he said, the economy seems to be slowly returning.

He is getting 10 to 15 calls or visits a week seeking rooms, he said.

Under the right conditions, many of those dead apartments can be revived, he said.

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